December 3, 2021 9:06:02

The dollar is making some gains this morning after deleveraging across the week abated and risk sentiment has turned more positive. It is noticeable that US Treasuries, which are closely correlated to USD/JPY, have been underperforming since Fed Chair Powell made his U-turn on the inflation threat to the US economy.

Yesterday saw more Fed officials support the call to speed up the taper process and create room for rate hikes in springtime next year. Another 500k print in the headline  non-farm payrolls data this afternoon should keep US rates and the buck supported. Wage growth will be a focus and if people are returning to the jobs market. This may give us a steer on the path for inflation in the coming months which is now the Fed’s primary concern.

USD/JPY steadies above strong support

After writing only last Wednesday about the new highs in USD/JPY and upside targets, prices obviously turned sharply lower as risk aversion went into overdrive. USD Treasury 10-year yields collapsed to 1.40% but look to have found some support here, even though they are underperforming after the Powell pivot.

USD/JPY broke down through a near-term trendline and recent support at the November low around 112.72. In fact, the major posted a new low at 112.53. But prices have held this level after testing it on a number of occasions over the last few sessions.

We are now trading just above trendline resistance/support from the March high around 113. The 50-day SMA sits at 113.45 ahead of next resistance just below 114. Any negative Omicron news will test that strong support at 112.72.